Background
Global
Healthcare REIT, Inc. (“Global” or “we” or the “Company”) was organized for the purpose of
investing in real estate related to the long-term care industry. Prior to the Company changing its name to Global Healthcare REIT,
Inc. on September 30, 2013, the Company was known as Global Casinos, Inc. Global Casinos, Inc. operated two gaming casinos which
were split-off and sold on September 30, 2013. Simultaneous with the split-off and sale of the gaming operations, the Company
acquired West Paces Ferry Healthcare REIT, Inc. (WPF). We plan to elect to be treated as a real estate investment trust (REIT)
in the future; however, we do not intend to make that election for the 2017 fiscal year.
We
acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. Our portfolio
will be comprised of investments in the following five healthcare segments: (i) senior housing, (ii) life science, (iii) medical
office, (iv) post-acute/skilled nursing and (v) hospital. We will make investments within our healthcare segments using the following
five investment products: (i) properties under lease, (ii) debt investments, (iii) developments and redevelopments, (iv) investment
management and (v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior
housing operations utilizing the structure permitted by RIDEA.
The
delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to
maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to
the following:
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Compelling
demographics driving the demand for healthcare services;
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Specialized
nature of healthcare real estate investing; and
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Ongoing
consolidation of a fragmented healthcare real estate sector.
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Our
Properties
Acquisition
of West Paces Ferry Healthcare REIT, Inc. (WPF)
On
September 30, 2013, Global acquired all of the outstanding common stock of WPF in consideration of $100. WPF owned a 65% membership
interest in Dodge NH, LLC, which owns a skilled nursing facility located in Eastman, Georgia.
In
2014, we formed and organized Southern Tulsa, LLC as part of our purchase of the Southern Hills Retirement Center in Tulsa, Oklahoma.
Southern Tulsa, LLC was formed as a wholly-owned subsidiary of WPF.
Acquisition
of Middle Georgia Nursing Home
Effective
July 1, 2012, Georgia Healthcare REIT, Inc., (“Georgia REIT”) a private company owned and controlled by a former affiliate,
consummated its first acquisition: the Middle Georgia Nursing Home. Middle Georgia Nursing Home is located at 556 Chester Highway
in Eastman, Georgia (“Middle Georgia” or the “Facility”). The Facility was acquired through Dodge NH,
LLC, a limited liability company formed for the purpose of acquiring Middle Georgia that was initially wholly-owned by Georgia
REIT. Dodge Investors, LLC was formed and organized as a financing entity to raise $1.1 million in funding to complete the financing
required to complete the acquisition, as more fully described below.
The
terms of the acquisition of Middle Georgia were as follows: The purchase price was $5.0 million, of which $4.2 million was paid
with the proceeds of a commercial mortgage with Colony Bank, as senior lender, which accrued interest at 6.25% per annum; and
the balance of $1.0 million was provided by Dodge Investors, LLC. Dodge Investors LLC funded Dodge NH, LLC with $1.1 million in
consideration of 13% unsecured notes and a carried 35% membership interest in Dodge NH, LLC. Of the $1.1 million raised by Dodge
Investors, LLC, $125,000 was invested by Georgia REIT from loan proceeds from the Company, representing a 4% membership interest
of the total 35% membership interest held by Dodge Investors, LLC. The Dodge NH, LLC notes purchased by Dodge Investors, LLC accrued
interest at the rate of 13% per annum, interest payable monthly, with the outstanding balance of principal and accrued and unpaid
interest due July 1, 2014.
Effective
March 15, 2013, Georgia REIT conveyed its entire 65% membership interest in Dodge NH to WPF. During 2014 and 2015, the Company
acquired the remaining membership interests in Dodge Investors, LLC and holds a 100% membership interest as of December 31, 2017.
The Company has also repaid the entire $1.1 million note to Dodge Investors, LLC.
Dodge
NH, LLC had an operating lease agreement with Eastman Healthcare and Rehab, LLC, owned by a professional skilled nursing facility
operator, having an initial term of five years expiring in June 2017, with an option to renew for an additional five-year period.
On January 22, 2016, the lease operator that operates the facility filed a voluntary petition in bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code. In 2018, the lease operator emerged from bankruptcy with a new five year lease.
Acquisition
of Warrenton Nursing Home
Effective
December 31, 2013, the Company consummated the purchase of the 110 bed Warrenton Nursing Home (“Warrenton”) located
in Warrenton, Georgia. Warrenton was purchased by ATL/WARR, LLC, a single purpose Georgia limited liability company (“Warr
LLC”) previously owned 95% by a former affiliate and 5% by an unaffiliated investor. Concurrently, the former affiliate
conveyed his 95% membership interest in Warr LLC to the Company for nominal consideration.
Warr
LLC entered into a Purchase and Sale Agreement dated April 3, 2013 (the “PSA”) with Providence Health Care, Inc.,
as seller, covering the Warrenton facility. The purchase price of Warrenton was $3.5 million, of which $2.72 million was provided
by a commercial senior bank loan, and approximately $984,500 was provided by the Company.
The
facility is covered by a five year operating lease that began July 2016.
Acquisition
of Southern Hills Retirement Center
Effective
February 7, 2014, the Company acquired the real property and improvements comprising a 100% interest in the Southern Hills Retirement
Center located in Tulsa, Oklahoma (“Southern Hills”). To complete the acquisition, the Company formed and organized
Southern Tulsa, LLC, a Georgia limited liability company, a new wholly-owned subsidiary of WPF.
The
Southern Hills facility is comprised of a senior living campus of three buildings totaling 104,192 square feet sitting on a 4.36-acre
parcel. The Center consists of a Assisted Living facility (“ALF”), an Independent Living facility (“ILF”)
and a Skilled Nursing facility (“SNF”). The Center offers 116 nursing beds, 86 independent living units, and 32 assisted
living beds. The ALF and ILF were split off to a new wholly-owned subsidiary, Southern Tulsa TLC, LLC, in 2014, to accommodate
a new financing through an industrial revenue bond.
The
purchase price for Southern Hills was $2.0 million, of which $1.5 million was provided by a senior mortgage with First Commercial
Bank, with the balance of $500,000 provided by Global. Global also provided a guaranty of the loan from First Commercial Bank.
On
March 1, 2014, the Tulsa County Industrial Authority issued $5.7 million of its First Mortgage Revenue Bonds and lent the net
proceeds to the Company. The Company used the proceeds to pay off the $1.5 million bridge loan, to pay certain costs of the bond
issuance, to renovate the 86 independent living units and 32-bed assisted living facility, and to establish a debt service reserve
fund and other initial deposits as required by the bond indenture. The debt is secured by a first mortgage lien on the independent
living units and assisted living facility (facilities), an assignment of the facilities leases, a first lien on all personal property
located in the facilities, and a guaranty by the Company. The debt bears interest at rates ranging from 7.0% to 8.5% with principal
and interest due monthly beginning in May 2014 through maturity on March 1, 2044. The loan agreement also contains financial covenants
required to be maintained by the Company.
The
SNF was refinanced with a commercial bank for $1,750,000. The SNF was under a five-year lease to Healthcare Management of Oklahoma
for an initial rent of $35,000 per month commencing February 1, 2015. On May 10, 2016, the Company obtained a Court Order appointing
a Receiver to control and operate the SNF. The former lease operator represented that it was unable to meet the financial commitments
of the facility, including the payment of rent, payroll, and other operating requirements. The transition to the Receiver resulted
in our engaging in a turnaround effort to restore viable operations at the SNF. Under the oversight of the Receiver, we have undertaken
substantial renovations at the SNF at a cost of over $1,500,000. In 2017, we and the Receiver entered into a Management Agreement
with a new operator.
The
ALF renovations are substantially complete. To date we have expended in excess of $2.0 million in upgrades at the ALF, and hope
to begin operations in the second quarter of 2018.
The
ILF requires renovation and is not subject to an operating lease. When the renovation is complete the Company plans to lease it
as well.
In
November 2017 we obtained a new line of credit for Southern Hills in the principal amount of $7.3 million. The line of credit
matures April 30, 2018; and we expect it to be renewed. The line of credit was used to refinance the $1.75 million loan on the
SNF and to repurchase some of the IRB’s on the ALF and ILF.
Acquisition
of Goodwill Nursing Home
Effective
May 19, 2014, the Company entered into a Membership Interest Purchase Agreement pursuant to which it acquired from Christopher
and Connie Brogdon (i) units representing an undivided 45% Membership Interest in Goodwill Hunting, LLC, a Georgia limited liability
company, and (ii) units representing an undivided 36.7% Membership Interest in GWH Investors, LLC, a Delaware limited liability
company (collectively, the “Units”). GWH Investors, LLC owns a 40% membership interest in Goodwill Hunting, LLC. Together,
the Company acquired, directly and indirectly, a 59.7% interest in Goodwill Hunting, LLC. The purchase price for the Units was
$800,000. The facility is subject to an aggregate of $4,601,009 in senior debt and $1,344,000 in non-affiliated subordinated debt.
Goodwill
Hunting, LLC owns the Goodwill Nursing Home, a 172 bed skilled nursing facility located in Macon, Georgia. It was leased to Goodwill
Healthcare and Rehabilitation, LLC under an operating lease that expires in 2017. In January 2016, concurrently with the Chapter
11 Bankruptcy filing by the lease operator, the Goodwill Nursing Home was closed by Georgia regulators and all residents were
removed. The Company has entered into a new ten year operating lease covering the facility which became effective in February,
2017 with the new operator having obtained all licenses, permits and other regulatory approval necessary to recertify and reopen
the facility. After receiving regulatory approvals, the lease operator invested approximately $2.0 million in capital improvements
in the property. The facility has been relicensed and began taking patients in December 2016 and is currently building census.
Effective
December 3, 2014, the Company acquired a 96.56% membership interest in GWH Investors, LLC, which holds a 40% membership interest
in Goodwill Hunting, LLC. The purchase price for the 96.56% interest in GWH Investors, LLC was 164,491 shares of common stock
of the Company.
The
subordinated debt in the amount of $1,280,000 matured on July 1, 2015. With accrued and unpaid interest, the outstanding balance
of the subordinated debt at December 31, 2017 was $1,344,000. Investors in the subordinated debt were entitled to an additional
5% equity in Goodwill Hunting, LLC every six months if the debt is not paid by the Company when due. Effective December 31, 2015,
the investors holding all of the outstanding interests in the subordinated debt executed an Agreement Among Lenders pursuant to
which they agreed to exchange their undivided interests in the note held by GWH Investors, LLC for separate, individual notes,
and (i) waived any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017,
in consideration for which Goodwill Hunting, LLC agreed to pay each investor a one-time premium equal to 5% of the principal amount
of the notes at such time as the notes are repaid.
In
April 2017, the former GWH Investors, LLC executed an Allonge and Modification Agreement pursuant to which they agreed to (i)
waive all accrued and unpaid interest (ii) waive further interest payments until January 2018 (iii) fix interest at 13% beginning
January 2018, (iv) extend the maturity date to December 31, 2019 and (v) agreed to accept an additional 15% premium payment upon
repayment of the notes. Giving effect to the foregoing, these investors are now entitled to a one-time 20% premium payment upon
repayment of the notes.
As
of December 31, 2017, the Company owns an 85% interest in Goodwill Hunting, LLC. That interest was 83.62% at December 31, 2015.
The former investors in GWH Investors, LLC still hold subordinated debt in the net amount of $1,280,000 plus accrued interest.
Acquisition
of Edwards Redeemer Health & Rehab
Effective
September 16, 2014, the Company acquired from a former affiliate a 62.5% membership interest in Edwards Redeemer Property Holding,
LLC, which owns the real property and improvements known as the Edwards Redeemer Health & Rehab, a 106 bed nursing home located
on 3.05 acres in Oklahoma City, Oklahoma.
Edwards
Redeemer Health & Rehab is operated under a triple-net operating lease to a regional professional skilled nursing home operator,
which expired in December 2017. On January 22, 2016, the lease operator that operates the facility filed a voluntary petition
in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The lease operator emerged from bankruptcy in 2017 and executed a
new five year lease.
The
purchase price for the 62.5% interest in the facility was $491,487, which was subject to an aggregate of $2,381,500 in debt. The
purchase price was offset in its entirety as a credit against an advance receivable owed by a former affiliate to the Company.
Effective
December 3, 2014, the Company acquired a 100% membership interest in Redeemer Investors, LLC which owned the remaining 37.5% membership
interest in Edwards Redeemer Property Holdings, LLC. The purchase price for the 100% interest in Redeemer Investors, LLC was 269,245
shares of common stock of the Company. As a result of these transactions, the Company now holds a 100% interest in Edwards Redeemer
Property Holdings, LLC.
The
investors in Redeemer Investors, LLC were repaid in full on January 23, 2015.
Acquisition
of Grand Prairie (formerly Golden Years Manor) Nursing Home
Effective
September 16, 2014, the Company acquired from a former affiliate a 44.5% membership interest in GL Nursing, LLC, which owns the
real property and improvements known as the Golden Years Manor Nursing Home located at 1010 Barnes Street in Lonoke, Arkansas.
The facility has 141 licensed beds and comprises 40,737 square feet on 3.17 acres.
Golden
Years Manor Nursing Home is operated under a triple-net operating lease to a regional professional skilled nursing home operator,
which will expire in May 2017. The lease currently generates $763,000 in gross annual rent.
The
purchase price for the 44.5% interest in the facility was 192,767 shares of common stock in Global Healthcare REIT, Inc. The facility
is subject to an aggregate of $4,671,537 in senior debt and $1,650,000 in subordinated debt.
Effective
December 3, 2014, The Company acquired a 26.25% membership interest in GLN Investors, LLC, which owned a 30% interest in GL Nursing,
LLC. The purchase price for the 26.25% interest in GLN Investors, LLC was 31,015 shares of common stock in Global Healthcare REIT,
Inc.
During
2015, the Company acquired an additional 73.48% in GLN Investors, LLC, bringing its interest to 100%. The purchase price for the
additional shares was 107,113 shares of common stock in Global Healthcare REIT, Inc.
In
January 2016, the Company acquired an additional 24.5% interest in GLN Investors, LLC, bringing its interest in GLN Investors
to 100%. The purchase price for the 24.5% interest was 54,000 shares of common stock of Global.
In
August 2016, the Company completed an exchange offering in which it purchased from the former members of GLN Investors, LLC all
of their interest in the $1,650,000 subordinated debt owed to GLN Investors, LLC by GL Nursing, LLC in consideration of 1.35 million
shares of Global.
As
a result of these transactions, at December 31, 2017, the Company held a 100% interest in GL Nursing, LLC. That interest was 75.5%
at December 31, 2015.
In
January 2016, affiliated entities of our lease operator filed a voluntary petition under Chapter 11 of the US Bankruptcy Code.
At the same time, our lease operator agreed to terminate its lease to allow a new operator to take possession of the facility.
At that time, operations at the facility had deteriorated and the operator was delinquent in the payment of bed taxes as well
a rent. The successor operator was unable to restore profitable operations and in August 2016 informed us that it was going to
terminate its lease, which would have resulted in a loss of the Certificate of Need (“CON”) required to operate as
a skilled nursing facility. Effective August 29, 2016, we executed a new operating lease with another operator. The initial lease
term is ten years with two five year renewal options. The lease term does not begin until the end of the straddle period described
below. The lease operator has also been granted an option to purchase the property any time after five years for a purchase price
of $6.4 million.
Under
the terms of the new lease, we agreed to cover all operating losses incurred by the new operator during a “straddle period”
during which the operator is not obligated to pay rent and has agreed to undertake substantial renovations and build the census
which had been significantly depleted during the prior two operator regimes. We have been honoring our commitment to cover these
losses, which to date have been approximately $350,000.
In
2017, we executed an amendment to the operating lease to clarify that the straddle period would end February 28, 2018. On or about
that date, the operator informed us that it would not continue as a lease operator. In March 2018, a new lease operator assumed
operations of the facility under an Operations Transfer Agreement.
Acquisition
of Providence of Sparta Nursing Home
Effective
September 16, 2014, the Company acquired from a former affiliate a 65% membership interest in Providence HR, LLC, which owns the
real property and improvements known as the Providence of Sparta Nursing Home. The facility has 71 licensed beds and is located
on approximately 8 acres in Sparta, Georgia.
Providence
of Sparta is operated under a triple-net operating lease to a regional professional skilled nursing home operator, which expired
in June 2016. A new lease with a new operator currently generates $510,223 in gross annual straight line rent for fiscal year
2017.
The
purchase price for the 65% interest in the facility was 61,930 shares of common stock of Global Healthcare REIT, Inc. The facility
is subject to an aggregate of $1,655,123 in senior debt and $1,050,000 in subordinated debt.
Effective
December 3, 2014, the Company acquired a 44.4% membership interest in Providence HR Investors, LLC, which owns a 30% membership
interest in Providence HR, LLC. The purchase price for the 44.4% interest in Providence HR Investors, LLC was 45,145 shares of
common stock of the Company.
During
2015, the Company acquired an additional 48.09% of Providence HR Investors, LLC bringing its interest to 92.46%. The purchase
price for the additional shares was 17,333 shares of common stock in Global Healthcare REIT, Inc. In October 2016, we purchased
the remaining 7.54% in outstanding interests in Providence HR Investors, LLC in consideration of 5,365 shares of common stock
of Global and $10.00.
The
subordinated debt in the amount of $1,050,000 matured on August 1, 2015. Providence HR Investors, LLC were entitled to an additional
5% equity in Providence HR, LLC every six months if the debt is not paid when due.
As
a result of these transactions, the Company now holds a 100% interest in Providence HR, LLC. The investors in Providence HR Investors,
LLC still retain $1,050,000 in subordinated debt.
In
March 2017, the former members of Providence HR Investors, LLC which hold the interest in the $1.05 million subordinated debt
all agreed to execute a Forbearance Agreement in which they agreed to (i) extend the maturity date of the note to December 31,
2017, (ii) waive accrued default interest and (iii) waive the equity ratchet that was triggered by the note not being repaid on
the original maturity date.
Effective
October 30, 2017, we completed a HUD refinance of this facility which included the repayment in full of the Providence Investor
HR notes.
Acquisition
of Greene Point Health Care Center
Effective
September 16, 2014, the Company acquired from a former affiliate a 62.145% membership interest in Wash/Greene, LLC, which owns
the real property and improvements known as the Greene Point Healthcare Center, located at 1321 Washington Highway in Union Point,
Georgia. The facility has 71 licensed beds and is located on approximately 9 acres.
The
purchase price for the 62.145% interest in the facility was 73,253 shares of common stock of Global Healthcare REIT, Inc. The
facility was subject to an aggregate of $1,692,000 in senior debt and $1,125,000 in subordinated debt.
Effective
December 3, 2014, the Company acquired 100% of the outstanding membership interests in 1321 Investors, LLC, which owned a 30%
membership interest in Wash/Greene, LLC. The purchase price for the 30% membership interest in 1321 Investors, LLC was 115,000
shares of common stock of the Company.
The
subordinated debt in the amount of $1,125,000 matured on October 1, 2015. Investors in the subordinated debt are entitled to an
additional 5% equity in Providence HR, LLC every six months if the debt is not paid when due. Effective December 31, 2015, the
investors holding all of the outstanding interests in the subordinated debt executed an Agreement Among Lenders pursuant to which
they (i) waived any and all equity ratchets and (ii) agreed to extend the maturity date of the subordinated debt to June 30, 2017.
Disposition
of Greene Point Health Care Center
Effective
June 30, 2016, the Company sold Greene Point Health Care Center for cash proceeds for $3,800,000 million. Cash proceeds from the
sale were used to pay off the existing mortgage loan in the amount of $1,683,200. The Company received $2,112,970 in cash from
the sale the facility, net of the senior loan, and used some of the proceeds to retire the subordinated debt owed to the former
members of 1321 Investors, LLC.
Meadowview
Healthcare Center
Effective
September 30, 2014, the Company purchased the Meadowview Healthcare Center located in Seville, Ohio (“Meadowview”)
and owns 100% of this facility. The facility is licensed for 100 skilled nursing beds, is 27,500 square feet and located on five
acres of land. Seville, Ohio is located approximately 25 miles west of Akron, Ohio and 40 miles south of Cleveland, Ohio in an
area with attractive population growth in the 65 to 74-year age bracket. The total purchase price for Meadowview was $3.2 million,
which was paid in cash using the proceeds of the Note Offering described below. Meadowview was acquired through High Street Nursing,
LLC, a wholly-owned subsidiary of the Company formed for the sole purpose of completing the purchase.
Effective
October 31, 2017, we completed a refinance of the mortgage notes with a $3.0 million term loan from ServisFirst Bank. We used
the proceeds of the loan to repay the mortgage notes issued in 2014.
Meadowview
is operated under a triple-net operating lease to a regional professional skilled nursing home operator, which expires in October
2024. The lease was generating $361,000 in gross annual rent; however, the operator has experienced adverse results in late
2017 and early 2018 and we are exploring solution including potentially changing operators. We have not identified a new operator
for this facility.
Abbeville
Health & Rehab
On
April 4, 2017, we successfully bid at foreclosure sale to purchase a 101-bed skilled nursing facility located In Abbeville, Georgia.
We formed a new wholly-owned subsidiary, Global Abbeville Property, LLC (“GAP”) for the purpose of bidding on the
facility. Colony Bank, the senior lender on the facility, was the party undertaking the foreclosure in light of the default of
the prior owner. The purchase transaction was consummated in May 2017.
The
purchase price for the Abbeville facility was $2.1 million which was entirely financed by Colony Bank through a newly approved
closed-end revolving credit facility in the maximum amount of $2.6 million. The additional $500,000 under the credit line was
used for renovations on a dollar-for-dollar matching basis. The loan agreement was executed in May 2017, and the maturity date
is April 25, 2021. It carries an interest rate of prime plus 0.5%, 4.75% minimum, 5.50% maximum, is cross collateralized with
the Eastman note with the same lender, and backed by a corporate guarantee from the Company. The transaction has been treated
as an asset acquisition financed by debt, with $20,000 land, $1,827,000 building, and $253,000 fixed assets allocated in relative
fair value. The Company recognized $38,421 in loan costs, which was amortized over the life of the loan.
The
facility was closed in March 2016 due to uncured deficiencies. On March 17, 2017, in anticipation of our purchase of the facility,
the State of Georgia approved initially a 45 day extension and then a six-month conditional Certificate of Need (“CON”)
to allow us to complete renovations and reopen the property. The Company assessed that the acquisition of the Abbeville facility
did not qualify as a business combination in accordance with the provisions of ASC 805. The Company accounted for the acquisition
as an acquisition of asset.
We
have completed approximately $1.0 million in renovations at this facility and got regulatory clearance to admit a small number
of residents in the first quarter of 2018. We still need further clearances to begin full scale operations.
We
have entered into a five year operating lease with a straddle period during which we have agreed to make working capital advances
to the operator to cover further improvements (“Advances”) which will be repaid with 12% interest. During the straddle
period, the operator will make nominal monthly rent payments of $15,000, which increase to $50,000 per year, with census adjustments,
after the end of the straddle period.
Recent
Financings
2014
Note Offering
The
Company completed a $3.2 million private offering of its 6.5% Senior Secured Convertible Promissory Notes (the “Notes”)
on September 26, 2014 (the “Note Offering”). The Notes accrue interest at the rate of 6.5% per annum, payable quarterly,
and mature on the third anniversary of the date of issue. The Notes can be called for redemption at the option of the Company
at any time (i) after September 15, 2015 but prior to September 15, 2016 at an early redemption price equal to 103% of the face
amount of the Notes, plus accrued and unpaid interest, or (ii) any time after September 15, 2016 but prior to September 15, 2017
at an early redemption price equal to 102% of the face amount of the Notes, plus accrued and unpaid interest. Each Note is convertible
at the option of the holder into shares of common stock of the Company at a conversion price of $1.37 per share. The Notes will
automatically convert into common stock at the conversion price in the event (i) there exists a public market for the Company’s
common stock, (ii) the closing price of the common stock in the principal trading market has been $2.00 per share or higher for
the preceding ten (10) trading days, and (iii) either (A) there is an effective registration statement registering for resale
under the Securities Act of 1933, as amended, the conversion shares or (B) the conversion shares are eligible to be resold by
non-affiliates of the Company without restriction under Rule 144 under the Securities Act.
The
Notes were secured by a senior mortgage on the Meadowview Healthcare Center located in Seville, Ohio. In October 2017, the notes
were repaid as part of a $3.0 million senior note refinance with ServisFirst Bank.
2016
– 2017 Senior Secured Note Offering
In
November 2016, the Company commenced a private offering of its 10% Senior Secured Promissory Notes in the aggregate amount up
to $1,500,000, on a best efforts basis. As of December 31, 2017, $1,200,000 of the notes have been issued. The notes bear interest
at a rate of 10% payable monthly with principal and unpaid interest due at maturity on December 31, 2018. For every $1.00 in principal
amount of note, each investor received one warrant exercisable for 12 months to purchase one share of common stock at an exercise
price of $0.75 per share. The warrants contain a cashless exercise provision. The notes are secured by a senior UCC security interest
in the tangible and intangible assets of the Company.
2017
Senior Note Offering
In
December 2017, the Company completed a private offering of 10% Senior Notes in the aggregate amount of $300,000. The notes bear
interest at the rate of 10% per annum payable monthly and mature on October 31, 2020. For every $1.00 in principal amount of note,
each investor received one warrant exercisable for 12 months to purchase one share of common stock at an exercise price of $0.75
per share. The warrants contain a cashless exercise provision.
Our
Business
Healthcare
Industry
Healthcare
is the single largest industry in the U.S. based on Gross Domestic Product (“GDP”). According to the National Health
Expenditures report by the Centers for Medicare and Medicaid Services (“CMS”): (i) national health expenditures are
expected to grow 1.2 percentage points faster than GDP per year over the 2016 – 2025 period; (ii) the average compounded
annual growth rate for national health expenditures, over the projection period of 2016 through 2027, is anticipated to be 5.6%;
and (iii) health spending is projected to represent 19.9% of US GDP by 2025, up from 17.8% in 2015.
Senior
citizens are the largest consumers of healthcare services. According to CMS, on a per capita basis, the 85-year and older segment
of the population spends 92% more on healthcare than the 65 to 84-year-old segment and over 329% more than the population average.
Business
Strategy
Our
primary goal is to increase shareholder value through profitable growth. Our investment strategy to achieve this goal is based
on three principles: (i) opportunistic investing, (ii) portfolio diversification and (iii) conservative financing.
Opportunistic
Investing
We
will make investment decisions that are expected to drive profitable growth and create shareholder value. We will attempt to position
ourselves to create and take advantage of situations to meet our goals and investment criteria.
Portfolio
Diversification
We
believe in maintaining a portfolio of healthcare investments diversified by segment, geography, operator, tenant and investment
product. Diversification reduces the likelihood that a single event would materially harm our business and allows us to take advantage
of opportunities in different markets based on individual market dynamics. While pursuing our strategy of diversification, we
will monitor, but will not limit, our investments based on the percentage of our total assets that may be invested in any one
property type, investment product, geographic location, the number of properties which we may lease to a single operator or tenant,
or mortgage loans we may make to a single borrower. With investments in multiple segments and investment products, we can focus
on opportunities with the most attractive risk/reward profile for the portfolio as a whole. We may structure transactions as master
leases, require operator or tenant insurance and indemnifications, obtain credit enhancements in the form of guarantees, letters
of credit or security deposits, and take other measures to mitigate risk.
Financing
We
will strive to manage our debt-to-equity levels and maintain multiple sources of liquidity, access to capital markets and secured
debt lenders, relationships with current and prospective institutional joint venture partners, and our ability to divest of assets.
Our debt obligations will be primarily fixed rate with staggered maturities, which reduces the impact of rising interest rates
on our operations.
We
plan to finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may arrange
for short-term borrowings from banks or other sources. We may also arrange for longer-term financing through offerings of equity
and debt securities, placement of mortgage debt and capital from other institutional lenders and equity investors.
Competition
Investing
in real estate serving the healthcare industry is highly competitive. We will face competition from REITs, investment companies,
private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors,
some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging
for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete may also be impacted
by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction
and renovation costs, existing laws and regulations, new legislation and population trends.
Income
from our facilities is dependent on the ability of our operators and tenants to compete with other companies on a number of different
levels, including: the quality of care provided, reputation, the physical appearance of a facility, price and range of services
offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location,
the size and demographics of the population in surrounding areas, and the financial condition of our tenants and operators. Private,
federal and state payment programs as well as the effect of laws and regulations may also have a significant influence on the
profitability of our tenants and operators.
Healthcare
Segments
Senior
housing
. Senior housing facilities include assisted living facilities (“ALFs”), independent living facilities
(“ILFs”) and continuing care retirement communities (“CCRCs”), which cater to different segments of the
elderly population based upon their needs. Services provided by our operators or tenants in these facilities are primarily paid
for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid
and Medicare. Senior housing property types are further described below.
Assisted
Living Facilities
. ALFs are licensed care facilities that provide personal care services, support and housing for those who
need help with activities of daily living (“ADL”) yet require limited medical care. The programs and services may
include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities,
community excursions, meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like
buildings with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal
assistance for residents with Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in
part on local regulations.
Independent
Living Facilities
. ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded by their
peers with services such as housekeeping, meals and activities. These residents generally do not need assistance with ADL, such
as bathing, eating and dressing. However, residents have the option to contract for these services.
Continuing
Care Retirement Communities.
CCRCs provide housing and health-related services under long-term contracts. This alternative
is appealing to residents as it eliminates the need for relocating when health and medical needs change, thus allowing residents
to “age in place.” Some CCRCs require a substantial entry or buy-in fee and most also charge monthly maintenance fees
in exchange for a living unit, meals and some health services. CCRCs typically require the individual to be in relatively good
health and independent upon entry.
Post-acute/skilled
nursing
. Skilled Nursing Facilities (SNF) offer restorative, rehabilitative and custodial nursing care for people not requiring
the more extensive and sophisticated treatment available at hospitals. Ancillary revenues and revenues from sub-acute care services
are derived from providing services to residents beyond room and board and include occupational, physical, speech, respiratory
and intravenous therapy, wound care, oncology treatment, brain injury care and orthopedic therapy as well as sales of pharmaceutical
products and other services. Certain SNFs provide some of the foregoing services on an out-patient basis.
Post-acute/skilled
nursing services provided by our operators and tenants in these facilities will be primarily paid for either by private sources
or through the Medicare and Medicaid programs.
Life
science
. These properties contain laboratory and office space primarily for biotechnology and pharmaceutical companies, scientific
research institutions, government agencies and other organizations involved in the life science industry. While these properties
contain similar characteristics to commercial office buildings, they generally contain more advanced electrical, mechanical, and
heating, ventilating, and air conditioning (“HVAC”) systems. The facilities generally have equipment including emergency
generators, fume hoods, lab bench tops and related amenities. In many instances, life science tenants make significant investments
to improve their leased space, in addition to landlord improvements, to accommodate biology, chemistry or medical device research
initiatives.
Medical
office
. Medical office buildings (“MOBs”) typically contain physicians’ offices and examination rooms, and
may also include pharmacies, hospital ancillary service space and outpatient services such as diagnostic centers, rehabilitation
clinics and day-surgery operating rooms. While these facilities are similar to commercial office buildings, they require additional
plumbing, electrical and mechanical systems to accommodate multiple exam rooms that may require sinks in every room, and special
equipment such as x-ray machines. In addition, MOBs are often built to accommodate higher structural loads for certain equipment
and may contain “vaults” or other specialized construction. We expect our MOBs will be typically multi-tenant properties
leased to healthcare providers (hospitals and physician practices).
Hospital.
Services provided by our operators and tenants in these facilities are paid for by private sources, third-party payors (e.g.,
insurance and Health Maintenance Organizations or “HMOs”), or through the Medicare and Medicaid programs. Hospital
property types include acute care, long-term acute care, and specialty and rehabilitation hospitals.
Investment
Products
Properties
under lease
. We plan to primarily generate revenue by leasing properties under long-term leases. Most of our rents and other
earned income from leases will be received under triple-net leases or leases that provide for a substantial recovery of operating
expenses. However, some of our MOBs and life science facility rents will be structured under gross or modified gross leases. Accordingly,
for such gross or modified gross leases, we may incur certain property operating expenses, such as real estate taxes, repairs
and maintenance, property management fees, utilities and insurance.
Our
ability to grow income from properties under lease depends, in part, on our ability to (i) increase rental income and other earned
income from leases by increasing rental rates and occupancy levels, (ii) maximize tenant recoveries and (iii) control non-recoverable
operating expenses. Most of our leases will include contractual annual base rent escalation clauses that are either predetermined
fixed increases and/or are a function of an inflation index.
Debt
investments.
Our mezzanine loans will generally be secured by a pledge of ownership interests of an entity or entities, which
directly or indirectly own properties, and are subordinate to more senior debt, including mortgages and more senior mezzanine
loans. Our interest in mortgages and construction financing will typically be issued by healthcare providers and will generally
be secured by healthcare real estate.
Developments
and redevelopments
. We will generally commit to development projects that are at least 50% pre-leased or when we believe that
market conditions will support speculative construction. We will work closely with our local real estate service providers, including
brokerage, property management, project management and construction management companies to assist us in evaluating development
proposals and completing developments. Our development and redevelopment investments will likely be in the life science and medical
office segments. Redevelopments are properties that require significant capital expenditures (generally more than 25% of acquisition
cost or existing basis) to achieve property stabilization or to change the primary use of the properties.
Investment
management
. We may co-invest in real estate properties with institutional investors through joint ventures structured as partnerships
or limited liability companies. We may target institutional investors with long-term investment horizons who seek to benefit from
our expertise in healthcare real estate. Predominantly, we plan to retain noncontrolling interests in the joint ventures ranging
from 20% to 30% and serve as the managing member. These ventures generally allow us to earn acquisition and asset management fees,
and have the potential for promoted interests or incentive distributions based on performance of the joint venture.
Operating
properties (“RIDEA”)
. We may enter into contracts with healthcare operators to manage communities that are placed
in a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”). Under
the provisions of RIDEA, a REIT may lease “qualified health care properties” on an arm’s length basis to a taxable
REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible
independent contractor.” We view RIDEA as a structure primarily to be used on properties that present attractive valuation
entry points, where repositioning with a new operator that is aligned with health care providers can bring scale, operating efficiencies,
and/or ancillary services to drive growth.
Government
Regulations, Licensing and Enforcement
Overview
Our
tenants and operators will typically be subject to extensive and complex federal, state and local healthcare laws and regulations
relating to fraud and abuse practices, government reimbursement, licensure and certificate of need and similar laws governing
the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased
regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services,
among others. These regulations are wide-ranging and can subject our tenants and operators to civil, criminal and administrative
sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory
environment because of a relative lack of guidance in many areas as certain of our healthcare properties will be subject to oversight
from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursement
enforcement activity and regulatory non-compliance by our tenants and operators can all have a significant effect on their operations
and financial condition, which in turn may adversely impact us.
We
will seek to mitigate the risk to us resulting from the significant healthcare regulatory risks faced by our tenants and operators
by diversifying our portfolio among property types and geographical areas, diversifying our tenant and operator base to limit
our exposure to any single entity, and seeking tenants and operators who are not largely dependent on Medicaid reimbursement for
their revenues. In addition, we ensure in each instance that our operators have obtained all necessary licenses and permits before
beginning operations, and require that those operators covenant that they will comply with all applicable laws and regulations
in connection with the facility operations.
The
following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.
Fraud
and Abuse Enforcement
There
are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements
and prohibiting fraudulent and abusive practices by such providers. These laws include (i) federal and state false claims acts,
which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare,
Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splitting statutes, including
the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or
recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as
the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate
family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things,
the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws,
including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide
for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal
and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid
reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced
by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal
and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our
operators and tenants are subject to these laws, and some of them may in the future become the subject of governmental enforcement
actions if they fail to comply with applicable laws.
Reimbursement
Sources
of revenue for many of our tenants and operators will include, among other sources, governmental healthcare programs, such as
the federal Medicare program and state Medicaid programs, and non-governmental payors, such as insurance carriers and HMOs. As
federal and state governments focus on healthcare reform initiatives, and as many states face significant budget deficits, efforts
to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain
services provided by some of our tenants and operators.
Healthcare
Licensure and Certificate of Need
Certain
healthcare facilities in our portfolio will be subject to extensive federal, state and local licensure, certification and inspection
laws and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies, handle
radioactive materials and operate equipment. Many states require certain healthcare providers to obtain a certificate of need,
which requires prior approval for the construction, expansion and closure of certain healthcare facilities. The approval process
related to state certificate of need laws may impact some of our tenants’ and operators’ abilities to expand or change
their businesses.
Americans
with Disabilities Act (the “ADA”)
Our
properties must comply with the ADA and any similar state or local laws to the extent that such properties are “public accommodations”
as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public
areas of our properties where such removal is readily achievable. To date, we have not received any notices of noncompliance with
the ADA that have caused us to incur substantial capital expenditures to address ADA concerns. Should barriers to access by persons
with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that
may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one,
and we continue to assess our properties and make modifications as appropriate in this respect.
Environmental
Matters
A
wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare
facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of
which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact
us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured
lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed
of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government
fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal
or property damages and the owner’s or secured lender’s liability therefore could exceed or impair the value of the
property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly
dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow
using such property as collateral which, in turn, could reduce our revenues.
Taxation
Federal
Income Tax Considerations
The
following summary of the taxation of the Company and the material federal tax consequences to the holders of our debt and equity
securities is for general information only and is not tax advice. This summary does not address all aspects of taxation that may
be relevant to certain types of holders of stock or securities (including, but not limited to, insurance companies, tax-exempt
entities, financial institutions or broker-dealers, persons holding shares of common stock as part of a hedging, integrated conversion,
or constructive sale transaction or a straddle, traders in securities that use a mark-to-market method of accounting for their
securities, investors in pass-through entities and foreign corporations and persons who are not citizens or residents of the United
States).
This
summary does not discuss all of the aspects of U.S. federal income taxation that may be relevant to you in light of your particular
investment or other circumstances. In addition, this summary does not discuss any state or local income taxation or foreign income
taxation or other tax consequences. This summary is based on current U.S. federal income tax law. Subsequent developments in U.S.
federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have
a material effect on the U.S. federal income tax consequences of purchasing, owning and disposing of our securities as set forth
in this summary. Before you purchase our securities, you should consult your own tax advisor regarding the particular U.S. federal,
state, local, foreign and other tax consequences of acquiring, owning and selling our securities.
General
We
will elect to be taxed as a real estate investment trust (a “REIT”) at such time as the Board of Directors, with the
consultation of our professional advisors, determines that we qualify as a REIT under applicable provisions of the Internal Revenue
Code. We cannot predict for which tax year that election will be made; however, we do not intend to make such an election for
2016. Therefore, applicable taxes have been recorded in the accompanying consolidated financial statements. Once we make the election
to be treated as a REIT, we intend to continue to operate in such a manner as to qualify as a REIT, but there is no guarantee
that we will qualify or remain qualified as a REIT for subsequent years. Qualification and taxation as a REIT depends upon our
ability to meet a variety of qualification tests imposed under federal income tax law with respect to income, assets, distribution
level and diversity of share ownership. There can be no assurance that we will be owned and organized and will operate in a manner
so as to qualify or remain qualified.
In
any year in which we qualify as a REIT, in general, we will not be subject to federal income tax on that portion of our REIT taxable
income or capital gain that is distributed to stockholders. We may, however, be subject to tax at normal corporate rates on any
taxable income or capital gain not distributed. If we elect to retain and pay income tax on our net long-term capital gain, stockholders
are required to include their proportionate share of our undistributed long-term capital gain in income, but they will receive
a refundable credit for their share of any taxes paid by us on such gain.
Despite
the REIT election, we may be subject to federal income and excise tax as follows:
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the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our “REIT
taxable income,” as adjusted, we will be subject to tax on the undistributed amount at regular corporate tax rates;
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If
we have net income from the sale or other disposition of “foreclosure property” that is held primarily for sale
to customers in the ordinary course of business or other non-qualifying income from foreclosure property, such income will
be taxed at the highest corporate rate;
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Any
net income from prohibited transactions (which are, in general, sales or other dispositions of property held primarily for
sale to customers in the ordinary course of business, other than dispositions of foreclosure property and dispositions of
property due to an involuntary conversion) will be subject to a 100% tax;
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If
we fail to satisfy either the 75% or 95% gross income tests, but nonetheless maintain our qualification as a REIT because
certain other requirements are met, we will be subject to a 100% tax on an amount equal to (1) the gross income attributable
to the greater of (i) 75% of our gross income over the amount of qualifying gross income for purposes of the 75% gross income
test or (ii) 95% of our gross income over the amount of qualifying gross income for purposes of the 95% gross income test
multiplied by (2) a fraction intended to reflect our profitability;
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If
we fail to distribute during each year at least the sum of (1) 85% of our REIT ordinary income for the year, (2) 95% of our
REIT capital gain net income for such year (other than capital gain that we elect to retain and pay tax on) and (3) any undistributed
taxable income from preceding periods, we will be subject to a 4% excise tax on the excess of such required distribution over
amounts actually distributed;
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We
will be subject to a 100% tax on the amount of any rents from real property, deductions or excess interest paid to us by any
of our “taxable REIT subsidiaries” that would be reduced through reallocation under certain federal income tax
principles in order to more clearly reflect income of the taxable REIT subsidiary;
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We
may be subject to the corporate “alternative minimum tax” on any items of tax preference, including any deductions
of net operating losses; and
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For
any investments which may qualify as prohibited transactions or restricted assets, we may elect to form a taxable REIT subsidiary
to hold such investments or operations. Income from the taxable REIT subsidiary is subject to taxes at the usual federal and
state tax rates.
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On
March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, which requires U.S. stockholders
who meet certain requirements and are individuals, estates or certain trusts to pay an additional 3.8% tax on, among other things,
dividends on and capital gains from the sale or other disposition of stock for taxable years beginning after December 31, 2012.
U.S. stockholders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition
of shares of our stock.
EMPLOYEES
As
of December 31, 2016, we had one full time salaried employee. For the year ended December 31, 2017, our CEO and CFO each received
compensation of equity valued at $157,558. The CEO and CFO were each compensated with equity valued at $38,000 per quarter for
those periods. The Company also engages the services of consultants from time to time, some of which may be provided by affiliates
of the Company at no cost.